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Index of Industrial Production – October ’18 Performance..

Index of Industrial Production (IIP) has recorded an increase of 8.1% for the month of Oct’18 as per the data released by MOSPI yesterday. While monthly rate may show substantial fluctuation, average growth rate for first seven months of this financial year also shows a substantial improvement. Average growth rate, which was only 5.2% till sept’18, climbs to 5.6% after including the result for Oct’18. Other that, average rate over first seven months is better than growth rate recorded in all the years since FY13. While IIP growth is important in general, it is more important since industries account for maximum number of employment and therefore, its performance is critical in generation of more employment opportunities. Here is a look at its various components and a longer term trend analysis.The Index of Industrial Production is arrived at by combining the production data of over 400 different products/ product groups. Each of these items has different weight in the calculation depending upon its share in value addition. (IIP includes a product group named “Human hair -articles thereof” with weight of 0.5%!). These products are combined together into Manufacturing which has a total weight of 77.6%, Mining (14.4%) and Electricity (8%). Manufacturing products are aggregated into 23 subgroups also, within which Basic metals (12.8%) and petroleum products (11.8%) account for the largest share. The weightage is not static but changes during base year revision depending upon the changes in contribution in production. For instance, weightage of electricity has come down from 10% in the earlier classification to 8% now. IIP classifies furniture and manufacture of wood/wood products separately even though their weight is just 0.1 and 0.2%. The reason could be that despite their low value addition, there share is higher in terms of employment generation and is therefore, addressed separately.

A look at the performance of these group shows that manufacturing sector recorded growth of 7.9% whereas mining grew at 7%. Electricity has grown at over10%, the best since April’16. For manufacturing sector, the average growth for the first seven month stands at 5.7%, substantial improvement from the low of 2.8% reached in FY16, the year of demonetization. Within manufacturing subgroups, computers, apparel, machinery and transport equipment recorded over 20% growth.

IIP is also classified on user based categories (UBC). These are primary goods, intermediate goods, capital goods, infrastructure/construction goods, consumer durables and consumer non-durables. Within this, primary goods have the highest weight at 34% followed by intermediate group at 17.2%. (High share of primary and intermediate goods is, in fact, not a good sign as it implies that industries are not doing sufficient value addition). Infrastructure/ construction goods is newly created group in 2011-12 base year revision and tracks the performance of industries which cater to infrastructure sector such as cement, steel materials, paints, cables, bricks, tiles etc.

As per UBC classification, capital goods and consumer durables have grown at as high as 17%. However, the figure needs more careful analysis to get the true picture. The case of capital goods index is quite unusual because it shows huge divergence in month on month basis. This is due to the fact that the sector is largely project based and therefore, ‘lumpy’ in nature. Even though companies recognize revenue based on percent completion method, the recognition is done conservatively and rest of the revenue is recognized in the last month of financial year leading to huge spike in March. This is evident from the fact that index in March has grown at more than 20% over February over last four years. However, growth rate can be deduced by looking at the average growth rate figure which was 7.3% till Sept’18 and goes up to 8.7% including Oct’18. Except for intermediate goods which grew at 1.8%, all other groups have grown at a healthy pace, in the range of 6-8%.